Significance of MSMEs:
- With aroSund 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output.
- They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India.
- About 20% of the MSMEs are based out of rural areas, which indicates the deployment of significant rural workforce in the MSME sector.
Measures announced:
- Changed Definition of MSME:
- Previously, an enterprise with investment up to Rs 25 lakh was called a micro unit. Under the new definition, a firm upto investment of Rs 1 crore is to be called Micro unit, of Rs 10 crore is to be called as small unit and investment greater than Rs 20 crore will be called as medium unit.
- With the changed definition both investment and turn over is used to define MSMEs. Under the new definition a firm with turn over of Rs 5 crore is to be called a micro unit, of Rs 50 crore will be called as small unit and turn over greater than Rs 100 core is to be called as Medium unit.
- It is to be noted that for an enterprise to come under the category of MSME it has to fulfill both investment and turn over conditions.
- Also, under the new definition, the differentiation between the manufacturing and service based MSMEs are being removed.
- Collateral free loans to MSMEs:
- In a major boost to the MSME sector, collateral free loan of 3 lakh crore rupees has been announced with a moratorium of 12 months. These loans will benefit 45 lakh small and medium units
What kind of problems do MSMEs in India face?
- Most of them are not registered anywhere. A big reason for this is that they are just too small. Even GST has its threshold and most micro enterprises do not qualify.
- This apparent invisibility tends to work for enterprises as well as against them. Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs.
- But, as it is clear in a time of crisis, it also constrains a government’s ability to help them. For instance, in some of developed countries, the government has tried to directly provide wage subsidy and extra credit to smaller firms but that could happen because even smaller firms were being mapped.
- Related to this is possibly the single-biggest hurdle facing the MSMEs – lack of financing.
- According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (or about Rs 11 lakh crore) of the credit MSME credit need that it can potentially fund.
- In other words, most of the MSME funding comes from informal sources and this fact is crucial because it explains why the Reserve Bank of India’s efforts to push more liquidity towards the MSMEs have had a limited impact.
- A key reason why banks dither from extending loans to MSMEs is the high ratio of bad loans, data show higher slippage for relatively bigger enterprises.
- The other big issue plaguing the sector is the delays in payments to MSMEs — be it from their buyers (which includes the government also) or things like GST refunds etc.
Impact of Covid-19:
- MSMEs were already struggling- in terms of declining revenues and capacity utilisation — in the lead-up to the Covid-19 crisis. The total lockdown has raised a question mark on the existence of many primarily because these are not firms that have too much cash to wait out the crisis.
- That explains the job losses, he said. According to a recent survey he did for “small and medium” firms in manufacturing, only 7% said they will be able to survive for more than three months with their cash in hand if their business remains closed.
- A big hurdle to restarting now is the lack of labour availability.
What about credit guarantees?
- Loans to MSMEs are mostly given against property (as collateral) — because often there isn’t a robust cash flow analysis available — but in times of crisis, property values fall and that inhibits the extension of new loans.
- A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters.
Way Forward:
- The RBI has been trying to pump money into the MSME sector but given the structural constraints, it has had limited impact.
- The government can provide tax relief (GST and corporate tax), give swifter refunds, and provide liquidity to rural India (say, through PM-Kisan) to boost demand for MSME products
- Identifying micro, small and medium enterprises and their workers
- Developing a vulnerability assessment framework of MSME sectors
- Increasing the capacity of the Samadhaan system to expeditiously clear government dues
- Improving the creditworthiness of small businesses.
